<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from to
Commission File Number 33-25984
--------
NET 2 L.P.
-----------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 13-3497738
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Lexington Corporate Properties Trust
355 Lexington Avenue
New York, NY 10017
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 692-7200
Securities registered pursuant to Section 12(b) of the Act: None
- ----------------------------------------------------------
Securities registered pursuant to Section 12(g) of the Act: Units of Limited
- ----------------------------------------------------------
Partnership Interests
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
---- ----
State the aggregate market value of the voting stock held by
non-affiliates of the Registrant.
Not Applicable.
There is no active public market for the units of limited partnership
interests issued by the Registrant.
<PAGE> 2
PART 1. - FINANCIAL INFORMATION
-------------------------------
ITEM 1. FINANCIAL STATEMENTS
----------------------------
NET 2 L.P. AND CONSOLIDATED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(In thousand, except units and per unit amounts)
March 31, 1999 (Unaudited) and December 31, 1998
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1999 1998
------ ---- ----
<S> <C> <C>
Real estate, at cost $ 96,913 $ 67,676
Less: accumulated depreciation 6,621 6,164
--------- ---------
90,292 61,512
Properties held for sale -- 4,624
Cash and cash equivalents 851 518
Restricted cash 6,973 9,861
Deferred expenses (net of accumulated amortization
of $698 and $634 in 1999 and 1998, respectively) 544 429
Rent receivable 1,793 1,693
Other assets 47 281
--------- ---------
$ 100,500 $ 78,918
========= =========
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
Mortgage notes payable $ 62,422 $ 41,519
Accrued interest payable 201 216
Accounts payable and other liabilities 131 179
--------- ---------
62,754 41,914
--------- ---------
Partners' capital (deficit):
General Partner (259) (274)
Limited Partners ($100 per Unit,
500,000 Units authorized, 477,167
Units issued and outstanding) 38,005 37,278
--------- ---------
Total partners' capital 37,746 37,004
--------- ---------
$ 100,500 $ 78,918
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE> 3
NET 2 L.P. AND CONSOLIDATED PARTNERSHIP
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per unit amounts)
Quarters Ended March 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
March 31,
---------
1999 1998
---- ----
<S> <C> <C>
Revenues:
Rental $2,257 $1,584
Interest and other 161 28
------ ------
2,418 1,612
------ ------
Expenses:
Interest 1,075 491
Depreciation 457 282
Amortization of deferred expenses 64 34
General, administrative, and other 181 123
------ ------
1,777 930
------ ------
Income before gain on sale of properties 641 682
Gain on sale of properties 709 --
------ ------
Net income $1,350 $ 682
====== ======
Net income per Unit of limited
partnership interest $ 2.77 $ 1.40
====== ======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE> 4
NET 2 L.P. AND CONSOLIDATED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Quarters ended March 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
March 31,
---------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,350 $ 682
-------- --------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 521 316
Gain on sale of properties (709) --
Other, net 71 49
-------- --------
Total adjustments (117) 365
-------- --------
Net cash provided by operating activities 1,233 1,047
-------- --------
Cash flows from investing activities:
Proceeds from sale of properties 5,333 --
Investments in real estate (29,237) --
-------- --------
Net cash used in investing activities (23,904) --
-------- --------
Cash flows from financing activities:
Proceeds of mortgage notes payable 21,208 --
Decrease in restricted cash 2,888 --
Increase in deferred expenses (179) --
Principal payments on mortgage notes (305) (180)
Cash distributions to partners (608) (609)
-------- --------
Net cash provided by (used in) financing activities 23,004 (789)
-------- --------
Net increase in cash and cash equivalents 333 258
Cash and cash equivalents at beginning of period 518 2,181
-------- --------
Cash and cash equivalents at end of period $ 851 $ 2,439
======== ========
Supplemental cash flow information:
Cash paid during the period for interest $ 1,090 $ 495
========= ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE> 5
NET 2 L.P. AND CONSOLIDATED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
1. The Partnership and Basis of Presentation
-----------------------------------------
Net 2 L.P. (the "Partnership") was formed as a limited partnership on
November 9, 1988, under the laws of the State of Delaware to invest in
real estate properties or interests therein net leased to corporations
or other entities.
As of March 31, 1999, the Partnership has a total of 477,167 Units
issued and outstanding held by approximately 2,050 limited partners.
The unaudited financial statements reflect all adjustments that are, in
the opinion of the General Partner, necessary to a fair statement of
the results for the interim period presented. For a more complete
understanding of the Partnership's financial position and accounting
policies, reference is made to the financial statements previously
filed with the Securities and Exchange Commission with the
Partnership's Annual Report on Form 10-K for the year ended December
31, 1998.
Management of the partnership has made a number of estimates and
assumptions relating to the reporting of assets and liabilities, the
disclosure of contingent assets and liabilities and the reported
amounts of revenues and expenses to prepare these financial statements
in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
2. Summary of Significant Accounting Policies
------------------------------------------
Net income per Unit amounts were calculated by using the weighted
average number of Units outstanding for each period and allocating 98%
of the income attributable for that period to the Limited Partners. The
weighted average number of Units outstanding was 477,167 for all
periods presented.
Certain amounts included in the prior year's financial statements have
been reclassified to conform with the current year's presentation.
3. The Partnership Agreement
--------------------------
For financial statement reporting purposes all items of income are
allocated in the same proportion as distributions of distributable
cash.
<PAGE> 6
NET 2 L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Continued
---------
Distributable cash attributed to a particular limited partner's Unit is
calculated from the date of admission to the Partnership. The unpaid
cumulative preferred return at March 31, 1999 totaled $24.91 million
($50.96 to $52.90 per Unit, per close). On April 30, 1999, the
cumulative preferred return that was unpaid at March 31, 1999 was
reduced by a cash distribution to the Limited Partners for the quarter
ended March 31, 1999 totaling $596,459 ($1.25 per Unit). The General
Partner received a cash distribution of $12,173 on April 30, 1999.
4. Properties
----------
During the quarter ended March 31, 1999, the Partnership entered into
the following real estate transactions:
<TABLE>
<CAPTION>
Capitalized Annualized Expiration Rentable
Date of Costs Base Rent Date Square
Acquisition Tenant Location ($000's) ($000's) (month/year) Feet
----------- ------ -------- -------- ---------- ------------ ----
<S> <C> <C> <C> <C> <C> <C>
January 8 Associated Grocers Ocala, FL $20,071 $ 1,872 12/18 696,597
March 23 Jones Apparel Bristol, PA 9,166 768 7/13 96,000
------- ------ -------
$29,237 $2,640 792,597
======= ====== =======
</TABLE>
On January 25, 1999, the Partnership sold thirteen of the fourteen NCS
Properties for a net proceeds of approximately $5.333 million which
resulted in a gain of approximately $709,000.
The following unaudited pro forma operating information for the three
months ended March 31, 1999 and 1998, were prepared as if the 1999 and
1998 acquisitions and dispositions were consummated as of January 1,
1998. The information do not purport to be indicative of what the
operating results of the Partnership would have been had the
acquisitions and dispositions been consummated on that date. Pro forma
amounts are as follows:
<TABLE>
<CAPTION>
Pro Forma
(In thousands, except per Unit amounts)
Quarter ended March 31,
1999 1998
---- ----
<S> <C> <C>
Revenues $2,605 $2,543
Expenses 1,963 2,005
------ ------
Net income $ 642 $ 538
====== ======
Net income per Unit of
limited partnership interest $ 1.32 $ 1.10
====== ======
</TABLE>
<PAGE> 7
NET 2 L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Mortgage Notes Payable
----------------------
During 1999, the Partnership obtained $21.208 million in mortgages
secured by its Ocala, Florida and Bristol, Pennsylvania Properties. The
mortgages bear interest at 7.25% per annum and mature in 2009. The
notes require yearly payments of principal and interest of $1,332,000
and $571,000, respectively and balloon payments of $10,700,000 and
$5,228,000, respectively at maturity.
6. Related Party Transactions
--------------------------
The LCP Group, L.P., an affiliate of the General Partner, is entitled
to receive a fee for managing the Partnership's properties in the
amount of 1% of gross annual rental receipts (or a greater amount in
certain circumstances). For the quarters ended March 31, 1999 and
1998, property management fees which are included in general and
administrative expenses totaled $22,000 and $15,000, respectively.
During 1999, an officer of the LCP Group and Lexington Corporate
Properties Trust, affiliates of the General Partner received
acquisition fees totaling $283,000 and $337,000, respectively.
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
Liquidity and Capital Resources
- -------------------------------
The Partnership attempts to maintain a working capital reserve equal to 1.5% of
the gross proceeds of its offering which is anticipated to be sufficient to
satisfy liquidity requirements. Liquidity could be adversely affected by
unanticipated costs, particularly costs relating to the vacancy of properties,
tenants experiencing financial difficulties, and greater than anticipated
operating expenses. To the extent that such working capital reserves are
insufficient to satisfy the cost requirements of the Partnership, additional
funds may be obtained through short-term or permanent loans or by reducing
distributions to limited partners.
The unpaid cumulative preferred return at March 31, 1999 totaled $24.91 million
($50.96 to $52.90 per Unit, per close), and was reduced by $596,459 ($1.25 per
Unit) with the first quarter 1999 distribution paid in April 1999.
During the quarter ended March 31, 1999, the Partnership entered into the
following real estate transactions:
<TABLE>
<CAPTION>
Capitalized Annualized Expiration Rentable
Date of Costs Base Rent Date Square
Acquisition Tenant Location ($000's) ($000's) (month/year) Feet
----------- ------ -------- -------- -------- ------------ ----
<S> <C> <C> <C> <C> <C> <C>
January 8 Associated Grocers Ocala, FL $20,071 $ 1,872 12/18 696,597
March 23 Jones Apparel Bristol, PA 9,166 768 7/13 96,000
------- ------ -------
$29,237 $2,640 792,597
======= ====== =======
</TABLE>
During 1999, the Partnership obtained $21.208 million in mortgages secured by
its Ocala, Florida and Bristol, Pennsylvania Properties. The mortgages bear
interest at 7.25% per annum and mature in 2009. The notes require yearly
payments of principal and interest of $1,332,000 and $571,000, respectively and
balloon payments of $10,700,000 and $5,228,000, respectively at maturity.
On January 25, 1999, the Partnership sold thirteen of the fourteen NCS
Properties for net proceeds of approximately $5.333 million which resulted in a
gain of approximately $709,000.
Except for the debt service requirements under the mortgages, there are no
material restrictions upon the Partnership's present or future ability to make
distributions in accordance with the provisions of its Partnership Agreement.
As of March 31, 1999, the restricted cash represents remaining proceeds from the
refinanced loan of approximately $1.6 million and proceeds from the sale of
properties under the Internal Revenue Code Section 1031, restricted for
investment in future acquisitions.
Impact of Year 2000
- -------------------
The Year 2000 compliance issue concerns the inability of computer systems to
accurately calculate, store or use a date after 1999. This could result in a
system failure or miscalculations causing disruptions of operations.
The Year 2000 issue affects virtually all companies and organizations.
The Partnership has been taking the necessary steps to understand the nature and
extent of the work required to make its core information computer systems and
non-information embedded systems Year 2000 compliant. The Partnership has
determined that it will not be necessary to modify, update or replace its
computer hardware and software applications.
<PAGE> 9
The vendor that provides the Partnership's existing general ledger software has
released a compliant version of its product which the Partnership is currently
using. The cost of the general ledger system did not have a material effect on
the Partnership's financial condition or results of operations. The
Partnership's properties, which have no scheduled lease expirations prior to
August 18, 2002, are subject to net leases and accordingly the Year 2000
compliance of embedded systems (e.g., security, HVAC, fire and elevator systems)
are the responsibility of the tenants. The Partnership has contacted each of its
tenants asking them to identify and evaluate the changes and modifications
necessary to make these systems compliant for Year 2000 processing. The cost
associated with the effect to make the embedded systems Year 2000 compliant are
the tenant's responsibility. However, no assurances can be given that the
properties embedded systems will be Year 2000 compliant by December 31, 1999 and
compliance costs, if any, incurred by the Partnership would not be significant.
The Partnership is communicating with significant third-party service providers
and vendors with which it does business to determine the efforts being made on
their part for compliance. The Partnership is attempting to receive compliance
certificates from all third parties that have a material impact on the
Partnership's operations, but no assurance can be given with respect to the cost
or timing of such efforts or the potential effects of any failure to comply.
Management will closely monitor the Partnership's entire Year 2000 compliance
function and will develop contingent plans no later than the third quarter of
1999, if necessary.
Results of Operations ($000)
- ----------------------------
<TABLE>
<CAPTION>
Increase (Decrease)
-------------------
Quarters ended March 31, Quarter ended
------------------------ -------------
1999 1998 March 31,1999
---- ---- -------------
<S> <C> <C> <C>
Total revenues $2,418 $1,612 $ 806
------ ------ ------
Total expenses
Interest 1,075 491 584
Depreciation 457 282 175
Amortization 64 34 30
General & administrative 181 123 58
------ ------ ------
1,777 930 847
------ ------ ------
Income before gain on sale
of properties 641 682 (41)
Gain on sale of properties 709 -- 709
------ ------ ------
Net income $1,350 $ 682 $ 668
====== ====== ======
</TABLE>
The changes in results of operations with respect to revenues, interest and
depreciation for the quarter ended March 31, 1999 are primarily attributed to
the operations of the real property investments acquired and additional debt
financing in 1998 and first quarter 1999.
General and administrative expenses increased in the quarter ended March 31,
1999, due to property appraisals performed on all properties.
<PAGE> 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
-------------------------------------------------
The Partnership's exposure to market risk relates to its variable rate credit
facility. As of March 31, 1999, the Partnership's variable rate indebtedness
represented 39% of total long-term indebtedness. During the first quarter of
1999, this variable rate indebtedness had a weighted average interest rate of
8.13857%. Had the weighted average interest rate been 100 basis points higher,
the Partnership's net income would have been approximately $61,000 less.
<PAGE> 11
PART II - OTHER INFORMATION
---------------------------
ITEM 1. Legal Proceedings - not applicable.
ITEM 2. Changes in Securities - not applicable.
ITEM 3. Defaults under the Senior Securities - not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders - not applicable.
ITEM 5. Other Information - not applicable.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit No. Exhibit
----------- -------
27 Financial Data Schedule
(b) Reports on form 8-K filed during the first quarter ended
March 31, 1999.
(1) Form 8-K dated January 7, 1999, filed January 22, 1999.
Provided financial information for certain acquired property
located in Ocala, Florida and pro forma financial information
for the Partnership.
<PAGE> 12
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NET 2 L.P.
By: Lepercq Net 2 L.P.
its general partner
By: Lepercq Net 2 Inc.
its general partner
Date: May 14, 1999 By: /s/ E. Robert Roskind
------------------------------------- -------------------------
E. Robert Roskind
President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from (A) The
Interim Consolidated Statements of Income for the Quarter Ended March 31, 1999
and The Consolidated Balance Sheets as of March 31, 1999 and is qualified in its
entirety by reference to such (B) Financial Statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 851
<SECURITIES> 0
<RECEIVABLES> 1,793
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 96,913
<DEPRECIATION> (6,621)
<TOTAL-ASSETS> 100,500
<CURRENT-LIABILITIES> 0
<BONDS> 62,422
0
0
<COMMON> 0
<OTHER-SE> 37,746
<TOTAL-LIABILITY-AND-EQUITY> 100,500
<SALES> 0
<TOTAL-REVENUES> 2,418
<CGS> 0
<TOTAL-COSTS> 457
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,075
<INCOME-PRETAX> 641
<INCOME-TAX> 0
<INCOME-CONTINUING> 641
<DISCONTINUED> 709
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,350
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
